7th Pay Commission hike: 5 ways to deal with the bonanza

7th Pay Commission:While you wait for the payout, FeMoney advises you to give a hard look at your entire finances and then decide on how you want to go about spending the money.

If you are a central government employee, you must be eagerly awaiting the notification of the 7th Pay Commission, which might come close after the declaration of the state election results on May 19. The payout could be substantial with salary hike and arrears adding up to a Rs 1.02 lakh crore impact on government finances.

The 7th Pay Commission recommendation, which are to come into effect from January 1, 2016, will enlarge the pay package of 47 lakh central government employees and 53 lakh pensioners. The Commission has recommended a 23.55 per cent hike in pay and allowance. While pay will go up by 16 per cent, increase in allowance will be 63 per cent and increase in pension 24 per cent.

The huge payout by the government has already made the Reserve Bank of India worried over the its impact on inflation. In its recent credit policy, the central bank said that it expect inflation to go up by 1-1.5 per cent on account of the increased money in hand of central government employees.

So if you are one of the beneficiaries of the 7th Pay Commission, what should you do with the bonanza that is expected to come soon? As is natural with such one-time windfall coming your way, there would be that temptation of splurge, plan for an expensive holiday or buy that new car that you have been eyeing for some time.

However, while you wait for the payout, FeMoney advises you to give a hard look at your entire finances and then decide on how you want to go about spending the money.

Financial advisor, Sanjeev Govila, CEO, Hum Fauji Initiative, believes one of the priorities should be to create an emergency fund out of the arrears that one gets in lump-sum. In his five-point advise to Central Government employees Govilla says one should keep finanical keep financial goals and proper asset allocation in mind while dealing with the money. “It is absolutely essential that the bulk money which one gets as 7th Pay Commission arrears should go for meeting financial goals. And that is where the asset allocation and risk attitude should flow from,” Govila told FeMoney.

Here are Govila’s 5-point suggestions on dealing with the 7th PayCommission bonanza:

Emergency fund creation: Creation of emergency fund out of the payout is the prime requirement. Even before looking at life’s goals one has to be prepared for unforeseen events. Most of us remain oblivious to this and do not plan for it. This results in costly loans, embarrassing borrowings from friends and relatives or emptying long-term coffers. As a thumb-rule, about six month’s expenses should set aside for an emergency fund. The question is where to keep it? It could ideally be in multiple small bank fixed deposits or liquid mutual funds.

Cater to life’s financial goals: Life’s goals can be divided into critical goals and lifestyle goals. Critical goals are those which have to be met at all costs, like children education and marriage, retirement and medical expenses, while the lifestyle goals, like changing your car, vacations, leisure and passion activities.

Proper asset allocation: Spreading investment across various assets to minimise risks should be considered the final frontier of life’s financial planning. Whatever wealth creation or destruction takes place finally, is generally due to correct or incorrect asset allocation. An asset allocation directly results as a delicate balance between your future money requirements, indicating the type of investment avenues you should invest in, and your risk attitude and risk taking capacity.

Decide between long-term and short term: As a general rule, equity is for long-term and debt for the short term, with real estate and gold figuring somewhere in between. Investment in real estate and gold should depend on the future outlook of both these asset classes as prices of these physical assets are dependent on their seasonal cycles.

Assesment of risk-taking ability: Risk-taking is erroneously tagged to age, even by many financial planners. However, it is both an attitude and the capacity to take risks, the latter being dictated more by your current financial well-being. Hence, it is always better to go in for a risk-profiling rather than guessing the same by ‘indications’ of behaviour.